Fiduciary responsibilities in pooled employer plans: A guide for financial advisors

Before recommending a pooled employer plan (PEP), financial advisors should understand how fiduciary responsibilities may be allocated, what duties participating employers retain and how to evaluate providers through a documented process.

Key takeaways about PEP fiduciary responsibilities:

• The fiduciary status of a retirement plan under the Employee Retirement Income Security Act (ERISA) depends on the functions and authority a party exercises.
• Fiduciary breaches may create legal and financial liability.
• PEPs shift certain 401(k) fiduciary responsibilities, including the roles of plan sponsor and plan administrator, to the pooled plan provider (PPP). The PPP is also responsible for selecting the PEP’s trustee.
• Participating employers remain responsible for selecting and monitoring the PPP.
• Financial advisors can help clients evaluate governance, fiduciary roles and provider oversight before making recommendations.

What are 401(k) fiduciary responsibilities?

401(k) fiduciary responsibilities include exercising discretionary authority over plan management, controlling plan assets and making administrative decisions.

Financial advisors do not automatically qualify as ERISA fiduciaries. Their status depends on the services they provide, the recommendations they make, the authority they accept and the discretion they exercise.

Core ERISA duties: Loyalty, prudence, diversification, plan documents and reasonable costs

ERISA fiduciaries must act solely in the interest of participants and beneficiaries, follow a prudent decision-making process, diversify investments when appropriate, follow governing plan documents and pay only reasonable plan expenses from plan assets. In this case, a prudent process means evaluating investments, monitoring performance and documenting significant decisions.

Who is a fiduciary? Named vs. functional fiduciaries

A named fiduciary is identified in the plan document and is responsible for the management and overall operational control of the PEP, whereas a functional fiduciary assumes fiduciary status by performing fiduciary tasks, regardless of title. For example, an investment professional who exercises discretionary authority over plan assets is a 401(k) plan fiduciary by virtue of that authority.

Thus, financial advisors can help an employer compare providers or understand plan features without automatically assuming responsibility for the investment fiduciary duties. They will become investment fiduciaries if they accept authority, exercise discretion, make specific recommendations or provide other fiduciary services.

What happens when a fiduciary breaches these duties?

Fiduciary breaches can create legal, financial and operational consequences. The severity of these consequences often depends on the duty involved and whether decisions followed a prudent, documented process.

Personal liability under ERISA

ERISA permits personal liability for losses resulting from a breach of fiduciary duty. That liability may stem from an imprudent process, conflicts of interest or failure to satisfy retirement fiduciary obligations, not necessarily poor investment performance alone.

When assessing personal liability, courts and regulators often examine how fiduciaries reached a decision and whether they documented that process.

Fiduciary liability insurance as one mitigation option

Fiduciary liability insurance covers certain legal expenses associated with alleged fiduciary breaches, but it does not satisfy ERISA obligations or replace prudent oversight. As such, fiduciaries remain responsible for monitoring service providers, documenting significant decisions and following a consistent governance process.

How a pooled employer plan redistributes fiduciary duty

The PPP serves as the named fiduciary and the ERISA section 3(16) plan administrator of the PEP. Operational, administrative and investment duties may be delegated to another party, such as a retirement plan recordkeeper or investment advisor. In all cases, participating employers retain responsibility for selecting and monitoring the PPP.

The pooled plan provider fiduciary roles

• Named fiduciary – Has the authority and responsibility to control, operate and manage the PEP.
• Plan administrator – Responsible for maintaining the day-to-day operations of the plan.
• Delegated administrative duties – May include distributing participant notices, maintaining eligibility and vesting records, processing loans and distributions, and providing testing and reporting services.

Note: The PPP remains responsible for the delegated functions. Delegation of these duties does not, by itself, make the service provider a fiduciary.

The 3(38) investment manager

A 3(38) investment manager accepts discretionary authority over investment selection and monitoring. If the employer hires the 3(38) investment manager, advisors can help the employer evaluate the manager’s governance, reporting and review processes.

What changes for the employer in a PEP?

Joining a PEP may reduce day-to-day administration, but it does not eliminate every employer responsibility. The division of duties depends on the governing documents, service agreements and appointed providers.

Area	In a single-employer plan	In a PEP
Plan administration	The employer may perform operational and compliance tasks or delegate them to service providers.	The PPP and their appointed providers assume many administrative functions, such as eligibility tracking, notices, testing and Form 5500 support.
Fiduciary roles	The employer is usually the plan sponsor and retains broad responsibility for selecting and monitoring providers.	The PPP, as named fiduciary and plan administrator, may assign certain duties to other providers, such as a plan recordkeeper or a (38) investment manager. Employers must still prudently select and monitor the PPP and any investment manager hired.
Investment oversight	The employer may select and monitor the investment lineup directly or appoint an investment fiduciary.	Investment responsibility may be assigned to a 3(38) investment manager, depending on the arrangement.
Reporting and audit	Employers are generally responsible for their own Form 5500 filing and plan audit requirements.	A PEP is generally treated as one plan for reporting purposes, with a single Form 5500 and, when required, a single audit for the PEP.
Reporting and audit	The employer must coordinate payroll data, contribution timing and employee information with the recordkeeper.	The employer still must provide accurate data and remit contributions on time, even when technology and providers help automate the process.
Plan design	The employer generally has broad control over plan features, subject to the provider’s platform and plan document.	The employer may retain choices over features, such as eligibility, matching, vesting and safe harbor provisions. However, the available options depend on the PEP.
Provider monitoring	The employer must evaluate and monitor each provider engaged by the plan.	Employers must monitor the PPP and the investment manager (if they select one), rather than assuming all oversight has been transferred.
Participant experience	The employer coordinates enrollment, education and service support with its providers.	The PEP may provide more consistent enrollment, education, technology and participant support.
Changing providers or leaving the plan	The employer controls the process, subject to contracts and plan termination or conversion requirements.	The PEP documents and service agreements govern exit procedures, asset transfer rules and provider-replacement terms.

Advisor perspective: The key question is which duties shift, who accepts them in writing and what the employer retains. Advisors can help clients review those details, compare alternatives and document why a particular arrangement fits the business.

Why financial advisors are turning to PEPs

PEPs may offer advisors a more efficient way to support small-business clients seeking a retirement plan with shared administrative and fiduciary support. These plans provide:

• A clear framework of fiduciary roles and retained employer responsibilities
• An opportunity to serve multiple small-business retirement plan clients
• Access to integrated payroll, recordkeeping and administrative support

When a PEP may not be the right fit

A PEP may not be ideal for businesses that need highly customized provisions, broader investment choice, control over providers or specialized services. Advisors can help such clients weigh the administrative support and fiduciary allocation of a PEP against flexibility, cost and control.

How advisors can evaluate a PEP for clients

Selecting a PEP involves more than comparing fees or investments. It requires an assessment of 401(k) fiduciary services, provider experience, governance, administrative support and integration with payroll, HR and benefits systems. Advisors can help their clients evaluate these criteria.

Provider evaluation criteria for advisors

Advisors can help clients compare providers across key areas that most directly affect fiduciary oversight, administration and the participant experience.

Questions to ask about a PPP:

• Fiduciary structure and accountability: Who serves as the PPP (the named fiduciary and 3(16) plan administrator by default) and 3(38) investment manager? Which duties are accepted in writing and which remain with the employer?
• Provider experience and service model: What experience does the provider have with PEPs, similar businesses and comparable plan designs?
• Administration and compliance: Who handles eligibility, notices, testing, Form 5500 filing, distributions, loans and corrections?
• Investment oversight: Who selects and monitors investments, and what governance and reporting processes apply?
• Payroll and data integration: How are payroll, eligibility and contribution data exchanged, reviewed and corrected? Who is responsible for identifying errors, coordinating corrections and communicating with the employer?
• Fees, compensation and transparency: What provider, investment and participant fees apply? How are fees allocated, what services are included, and what compensation or financial relationships should the employer understand?
• Participant experience and reporting: What enrollment, education, digital support and reporting are available to employees, employers and advisors?
• Risk, flexibility and exit terms: What bonding, insurance, cybersecurity, indemnification, plan design and exit provisions apply?

Documenting the selection and monitoring process

Advisors can encourage plan sponsors to document why a PEP was selected, what alternatives were considered, how fees and services were compared and which retirement plan fiduciary responsibilities remain with the employer.

After the plan is implemented, periodic reviews should cover provider performance, service standards, fees, investment reporting, compliance support, cybersecurity and whether each provider continues to fulfill its assigned responsibilities.

401(k) fiduciary responsibility checklist for financial advisors

This checklist can help guide conversations with plan sponsor clients when evaluating a PEP.

• Confirm the structure of the PEP and who is responsible for various functions.
• Identify which responsibilities are shifted to the PPP and which remain with the employer.
• Review administrative, investment and payroll integration responsibilities.
• Compare fees with the services provided.
• Document the selection rationale and ongoing provider-monitoring process.

Supporting prudent fiduciary oversight

Financial advisors can help employers understand how retirement plan fiduciary responsibilities may be allocated, evaluate PEP fit and document a prudent selection and monitoring process. ADP Retirement Services, in turn, helps financial advisors and plan sponsors simplify plan administration through integrated retirement, payroll and HR solutions.

FAQs about PEP fiduciary responsibilities

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